Fed Rate Cut: 2 Growth Stocks to Buy Right Now

The Federal Reserve cut the federal funds rate (the overnight interest rate) by 50 basis points on Wednesday, which was double the 25 basis point adjustment it usually uses. Inflation has fallen sharply over the past year, while the unemployment rate has remained relatively constant (although starting to rise), which were two key reasons for the decision.

The interest rate cut will likely lower interest rates and give consumers more disposable income in addition to greater borrowing capacity, which can create a strong tailwind for the economy. Lower rates are especially beneficial for companies related to the real estate sector and companies that are sensitive to consumer spending.

With two more Fed rate cuts to come before the end of 2024, here’s why investors might want to buy stocks at The Zillow Group (Z 3.87%) (ZG 4.13%) and Netflix (NFLX 2.23%) right now.

1. The Zillow Group

The housing market has been decimated over the past two years by rising interest rates. US existing home sales reached an annualized 3.9 million units in July, which is 40% below the recent peak of 6.6 million in 2021. Simply put, it has become much less affordable for consumers to contract a mortgage with rising rates, and existing homeowners. they were reluctant to sell because they did not want to give up existing lower rates.

The decline in home sales is a headwind for Zillow, which operates a housing “super app” to offer a portfolio of services to both home sellers and home buyers. These services include an online marketplace, home value estimates (Zestimates), virtual tour, mortgage financing and a rental platform. Then there’s Premier Agent, a platform designed to give brokers the tools they need to connect with buyers and sellers and manage their business.

Zillow generated $1.1 billion in revenue in the first six months of 2024, which represented a 12.9% year-over-year increase. It was an impressive result considering the negative state of the housing market at the moment. The company’s mortgage and lettings businesses were particularly strong; generated revenues of $65 million and $214 million, respectively, both figures up 30% compared to the first half of last year.

Zillow shares are down 67% from their all-time high — but it’s not just because of the weak housing market. The company exited its iBuying business in 2021, which was its biggest source of revenue. It involved Zillow buying homes from willing sellers with the intention of flipping them for a profit, but that has become increasingly risky with rising interest rates on the horizon.

Zillow is now in a rebuilding phase and is focusing solely on its portfolio of services. The company is on track to generate $2.2 billion in revenue in 2024 (according to Wall Street forecast), but that’s a drop in the bucket compared to its addressable market of $187 billion. Falling interest rates should spark real estate deals, which will help Zillow capture more of this opportunity in the coming years, so now could be a great time to buy the stock.

2. Netflix

Lower interest rates could be a tailwind for Netflix because consumers will have more disposable income, which could lead to more streaming subscriptions. But the lower rates could also entice more companies to try Netflix’s fast-growing advertising platform to tap into a pool of potential new customers with cash in their pockets.

Netflix added more than 8 million new subscribers in the second quarter of 2024 (ended June 30), bringing its total to 277.6 million. This represented a 16.5% increase year-on-year, which was the fastest pace in three and a half years. The company said 45 percent of its new signups were attributed to its advertising tier (in markets where it’s available), which is priced at $6.99 per month — much cheaper than its standard tier ($15.49 USD per month) and the premium tier ($22.99 per month). month).

Netflix says the ad tier monetizes at a slightly lower rate than its standard tier, in part because it has grown so quickly that the company is sitting on a lot of unsold ad inventory. However, this is likely to change over time as global brands like it McDonald’s and Coca cola access the platform to reach customers, and others will likely follow.

Why? Because three years ago, streaming accounted for 27% of the time consumers spent watching TV, and that number is now over 40%. The streaming industry is now investing heavily in live programming, so the number is likely to continue to grow. Netflix, for example, will live stream both NFL games on Christmas Day and recently signed a 10-year deal to become the home of World Wrestling Entertainment (WWE) starting next year. This will include weekly live programming in addition to special live events.

In other words, companies will soon have no choice but to spend their TV ad dollars on platforms like Netflix to reach their target audience.

Netflix generated $36.2 billion in total revenue over the past four quarters, but that’s just 6 percent of its estimated $600 billion market, which includes streaming subscriptions, branded advertising, pay TV and gaming. So it’s not too late to take a long position in Netflix stock today, especially as lower interest rates could generate more activity in its business.